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AAT shines light on ASIC in stapled security buy back

A selective buy-back of interests in a managed investment scheme (including stapled securities that include units in a trust) requires extensive ASIC relief.

ASIC’s attempt to withhold this relief for a selective buy-back of stapled securities by the Lantern Hotel Group was recently overturned on review.

The case highlights the importance of carefully structuring and executing transactions of this type, which cannot be undertaken without ASIC’s approval.

Although ASIC’s attempts to prevent a buy-back of listed stapled securities by withholding regulatory relief was recently frustrated in the Administrative Appeals Tribunal (AAT), the Lantern Hotel Group (Lantern) litigation is a timely reminder of the fact that ASIC has far greater influence in selective buy-back of stapled securities (and other MIS interests) than is the case for similar transactions in relation to shares. Issuers undertaking selective buy-backs of stapled securities (including tender buy-backs) must therefore engage with ASIC early in the process and ensure that all elements of the transaction are uncontroversial from a regulatory standpoint.

Background

Lantern is listed on ASX and has quoted stapled securities, each comprising a share and a unit in a trust (ie a managed investment scheme (MIS)). In mid-2014, ASIC declined to provide Lantern with the regulatory relief necessary for it to undertake a selective buy-back of the stapled securities of one of its significant holders.

The facts surrounding the proposed transaction and subsequent litigation are complex. In summary however, Millinium Asset Services Pty Limited (as trustee for the Borg Fund) (Millinium) held 24.3% of Lantern and irrevocably offered its securities to Lantern. After the Lantern board had resolved to accept Millinium’s offer but before this was communicated, Millinium entered into call option deeds over its Lantern stake with other purchasers. Lantern commenced legal action against Millinium and the two optionholders to prevent exercise of the options, ultimately resulting in a settlement deed between the four parties. Among other things, the settlement deed provided for Lantern to buy back Millinium’s stapled securities on amended terms.

Lantern commenced the process of implementing the buy-back, obtaining securityholder approval, retaining an independent expert’s report (who delivered a favourable opinion in respect of the transaction) and applying for the requisite regulatory relief.

ASIC relief required for selective buy-backs of units

The Corporations Act 2001 (Act) contains provisions regulating selective buy-backs of shares. However, the provisions of the Act relating to MIS (including listed unit trusts) prevent the selective buy-back of units, including those that are stapled to shares. Even a straightforward selective buy-back of listed units, such as that proposed by Lantern, will typically require a suite of regulatory relief from ASIC, including modifications of, or exemptions from:

the requirement that unitholders’ withdrawal rights be fair to all members and set out in the constitution, and

the requirement that withdrawal (ie buy-back) offers from trusts that are not ‘liquid’ be time limited and made to all unitholders in writing, and specify the assets that will be used to fund the buy-back,

and potentially relief from other provisions that are not specific to MIS, such as the provisions regulating unsolicited offers to purchase securities.

ASIC’s approach and the AAT’s decision

After some vacillation, ASIC declined Lantern’s application for relief. ASIC advanced a long list of reasons for doing so, including:

concern that the reduction in the trust’s assets (resulting from the buy-back) disadvantaged the remaining Lantern holders,

the fact that the buy-back price represented a premium to prevailing market prices of Lantern stapled securities,

concern that Lantern holders had not been given sufficient time to consider the proposal before the member meeting to approve the buy-back, and

dissatisfaction with Lantern’s disclosure about the relationships between two of its four directors and entities associated with Lantern’s largest shareholder (which would enjoy an increase in its voting power in Lantern as a result of the buy-back).

Lantern successfully applied to the AAT for review of ASIC’s decision to decline the necessary relief. The AAT rejected each of ASIC’s grounds for refusing the necessary relief and ordered that the relief be granted to Lantern to permit the transaction to proceed.

Market relevance

The AAT’s granular reasoning for dismissing each of ASIC’s arguments is of limited relevance to other issuers of stapled securities (or MIS generally) contemplating undertaking a selective buy-back (including a tender buy-back).

The importance of the Lantern litigation is that it highlights the significant amount of relief required from ASIC in order undertake a selective (including tender) buy-back of interests in an MIS (including stapled securities that include trust units). For this reason it is important that, among other things:

any peculiarities of the proposed transaction structure be considered from a regulatory policy perspective, and ASIC consulted as soon as possible,

where possible, the buy-back structure mirror similar structures that have share buy-back precedents, and

Although ASIC’s approach may be tempered by the outcome of the Lantern litigation, it is fair to assume that it will continue to use the leverage that its relief function confers to carefully scrutinise MIS buy-backs.

Post script

Following the AAT’s decision, Lantern attempted to enforce the settlement deed, including the buy-back of Millinium’s stapled securities. Before this could occur, Millinium successfully requisitioned a member meeting, resulting in the replacement of the majority of Lantern’s directors.

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